New U.S. sanctions hit top Russian firms; Kiev says Russia shoots down its jet

WASHINGTON/MOSCOW (Reuters) - President Barack Obama imposed sanctions on some of Russia’s biggest firms for the first time, striking at the heart of Vladimir Putin’s powerbase by targeting companies closest to him over Moscow’s failure to curb violence in Ukraine.

A pro-Russian separatist from the Vostok (East) battalion stands guard near a T-64 tank in Donetsk, eastern Ukraine, July 16, 2014. REUTERS/Maxim Zmeyev

In the latest escalation of the conflict on the Ukrainian-Russian frontier, Kiev said a Russian jet had shot down one of its warplanes, its strongest accusation yet of direct Russian military involvement in the war. A Ukrainian military spokesman said the pilot of the SU-25 fighter ejected to safety.

After months of measures that hit only individuals and smaller firms, Washington imposed sanctions on Russia’s largest oil producer Rosneft, its second largest gas producer Novatek and its third largest bank Gazprombank. The firms are run by Putin allies who have become wealthy during his tenure.

Moscow denounced what it called primitive revenge for events in Ukraine and pledged to retaliate. Putin said the U.S. sanctions would hurt U.S. energy companies and bring relations to “a dead end”. His prime minister, Dmitry Medvedev, called the sanctions evil, said they would not “bring anyone to their knees” and that Russia would pay attention to defence spending.

The sanctions in effect close the firms to medium- and long-term dollar funding. Other targets include Vnesheconombank, VEB, which acts as payment agent for the government, and eight arms firms, including the producer of the Kalashnikov assault rifle.

However, Washington stopped short of freezing the companies’ assets, closing off the short-term funding they need for day-to-day operations or stopping U.S. firms doing business with them. Several were quick to say it was business as usual.

Russia’s rouble-traded stock market and the rouble itself fell on opening but did not collapse. After stabilising, Rosneft was down around 4.5 percent and Novatek 7.5 percent. The MICEX index was off 2.6 percent.

There was no suggestion of disruption to production by Rosneft, by output the world’s biggest oil company listed on a stock exchange, which singlehandedly produces 4 percent of the world’s oil, more than any OPEC country apart from Saudi Arabia.

An actual disruption to such a huge producer could in theory cause a global energy crisis, but there was no sign of one on Thursday, with oil prices only fractionally higher.

EU SANCTIONS

The measures mean that Washington has moved far further to punish Russia than its EU allies, who collectively do 10 times as much trade with Russia as the United States and depend on Moscow for natural gas. Nevertheless, the European Union also said it was imposing new sanctions and would draw up a list of targets by the end of the month. It will block new loans to Russia through two development banks.

Moscow said the EU had “succumbed to the blackmail of the U.S. administration” to follow Washington in imposing sanctions. Some Russian officials predicted Brussels would baulk at the cost of the U.S. measures.

But Ukraine’s Prime Minister Arseny Yatseniuk said the simultaneous action by Washington and Brussels showed that Western countries were united in their support for Ukraine.

“All attempts by Russia to split the European Union, and to stop the European Union and United States from agreeing, were doomed to failure,” he told his government in a cabinet meeting.

Russia must stop supplying weapons to Ukraine’s rebels, and any attempt to take Ukraine would fail, he said.

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The sanctions show a new willingness to act by Western countries over a crisis that has escalated in recent weeks. Hundreds of people have died in fighting between Ukrainian troops and heavily armed pro-Russian separatists who have declared independent “People’s Republics” in two provinces.

Moscow denies supporting the rebellion, but many of the separatist fighters and their main leaders are from Russia. Kiev says they have been bringing heavy weapons across the border.

The downing of the SU-25 fighter, which Kiev said on Thursday had taken place on Wednesday evening, was the first time Ukraine has unconditionally accused Moscow of using its air power in the war. On Monday a Ukrainian transport plane was shot down by what Kiev said was a missile fired from Russia, but it could not say if it was fired from the air or the ground.

Putin, who annexed Ukraine’s Crimea peninsula in March and has referred to southern and eastern Ukraine as “new Russia”, had appeared keen in recent weeks to tamp down the worst confrontation with the West since the Cold War, pulling back tens of thousands of troops from the frontier.

But in recent days, Washington and Brussels say, he has again sent some 12,000 troops to the frontier, while keeping the border open to allow rebel fighters and arms to cross.

Ukraine drove rebels out of their main bastion in the town of Slaviansk this month, but hundreds of them have decamped to Donetsk, a city of nearly a million people, which has been emptying as thousands of residents flee an expected battle.

EUROPE ON BOARD?

Obama warned of more sanctions if Russia did not take concrete steps to ease the conflict and said Putin had so far failed to take steps needed to resolve the crisis peacefully.

“We have emphasized our preference to resolve this issue diplomatically, but that we have to see concrete actions and not just words that Russia, in fact, is committed to trying to end this conflict along the Russia- Ukraine border,” he said.

The limits on the sanctions show how difficult it can be for Western countries to punish Moscow without causing global economic havoc. Russia is the world’s largest oil producer and, after the United States, second largest producer of natural gas.

The latest measures appear designed to restrict the firms’ access to investment capital while avoiding any disruption to energy output. Notably, Russia’s biggest company, gas export monopoly Gazprom which supplies around a third of Europe’s gas, was not included on the sanctions list.

Still, sanctions can have a strong indirect effect on Russia’s economy by forcing companies to reconsider investments there because of future risk. Previous rounds of U.S. and EU sanctions that targeted only a few dozen individuals and firms helped encourage billions of dollars in capital flight that hurt Russia’s shaky economy.

Rosneft, which under Putin absorbed the assets of a raft of oil companies that were privatised in the 1990s, is the only Russian firm that rivals Gazprom in scale. It had sales of $40 billion in the first quarter, about 8.6 percent of Russia’s GDP.

Its boss Igor Sechin, Putin’s close friend since the 1990s, has moved aggressively to win the company a bigger global profile. It supplies virtually every major international oil company and has joint projects with many of them.

In particular, it accounts for around a quarter of production for BP, which owns 20 percent of it. It is also in the midst of a deal to buy the oil trading assets of U.S. investment bank Morgan Stanley and has several big oil projects in Russia with Exxon Mobil.

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Sechin, travelling with Putin in Brazil, said the sanctions were “unjustified, subjective and unlawful, because the company has no role in the Ukraine crisis”.

Novatek was not available for comment. VEB declined to comment. Gazprombank said the stability of its operations and finances were not affected. BP said the sanctions appear on first glance to focus on restricting access of targeted firms to medium and long-term U.S. financing.